Will the Government stop your SMSF borrowing?

There has been a lot of discussion in the media as to whether the government is intending to remove the borrowing provision referred to as “limited recourse borrowing arrangements” (LRBA) from the superannuation law.  Removing the provision was one of the recommendations made by a recent inquiry into various financial services matters.

It has taken this long to structure the law in such a way to protect assets of a self-managed superannuation fund (SMSF) where the SMSF is unable to repay the loan, so a complete ban may not eventuate. 

Most advisers now understand how to structure an LRBA, organise the necessary paperwork and ensure the correct wording appears on the relevant documents associated with LRBAs. 

If the government decides to impose some restrictions on LRBAs, it may impose tighter controls which only allow financial institutions to lend money under an LRBA or only allowing commercial properties to be acquired by SMSFs under LRBAs.

If the law is changed, the government will most likely put in place “grandfathering” provisions or transitional provisions, allowing people who have already entered into LRBAs to continue to do so by complying with the requirements under the old law.

So if it is your intention for your SMSF to enter into an LRBA to acquire an asset, then you will need to consider whether to do so now in case the law is changed or abandoned.

So what is an LRBA?

A limited recourse borrowing arrangement allows an SMSF to borrow money to purchase an asset.  The asset is “quarantined”, from the SMSF’s other assets, by being held in a separate trust referred to as a bare trust.  Under the current law, anyone can lend the money to the SMSF but the terms must be under a limited recourse.  This means, if the SMSF defaults in any loan repayments the lender only has the right to take the asset that is held by the bare trust and cannot touch any of the SMSF’s other assets.

So you can see already that this borrowing provision is unlike other loan contract.  If you were to borrow money from a financial institution to acquire a property, it is usually on a full recourse basis.  If you default in loan repayments on a full recourse basis, the lender can come and take the property as well as anything else that you might list as security on the loan.

The problem is that if the LRBA is not structured correctly, you may only be provided with two options by the ATO.  The first option is to get rid of the loan and the second is to get rid of the asset that has been acquired with the borrowings.  Both options may end up costing the SMSF a great deal of money.

What to consider in structuring an LRBA

Some of the more common issues people face (and often get wrong!) when attempting to structure their LRBA include:

  • Buying Property with multiple titles;
  • Buying parcels of shares;
  • Who is the Trustee of the Bare Trust;
  • How to make an offer;
  • Providing deposits; and
  • Acquiring finance through related parties

We have assisted clients in setting up valid LRBA’s for their SMSF and would be happy to discuss your personal situation with you to see if this is an option for your SMSF. We will outline the requirements and likely costs and leave for you to decide whether this structure is appropriate for your circumstances. Contact Robinsons Chartered Accountants today to arrange a meeting.

 


Tuesday, 10 March 2015
Group: Taxation
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